A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

December 10, 2006

Business, Innovation and Survival

Perhaps the fatalism inherent in my Latin and Eastern European Jewish roots trumps the optimistic, "can-do-anything" spirit of my Anglo-Saxon adopted country. But I find that when discussing innovation with business executives, I like to stress the critical role of innovation in helping to keep companies out of trouble and helping them survive when they do get in trouble.

Part of it is to make the point of how serious it is to have an innovation culture in a company as part of its long term strategy. If innovation sounds too much like a way to make employees feel happy in the near term or produce more inventions and patents, business executives may think that this is something optional - a touchy-feely "soft subject" that you can take or leave. But if those same people can be convinced that an innovation culture is one that knows how to deal with tough competition and survive, perhaps they will give the subject the very serious attention it deserves.

A business generally achieves a position of leadership or prominence in a specific market environment. It might be the first to figure out how to bring to market a sophisticated product or service. It might come up with a particularly novel customer support strategy. It might be ahead of its competition in understanding the right business model. These or any number of other firsts may make it successful in the marketplace. This is the happy, growth phase of a business, when every move seems right and you keep distancing yourself from all competitors. Everyone loves you and tells you how smart you are. It is a ball while it lasts.

But inevitably, success invites more and more competitors who will look for all kinds of ways to gain customers and market share at your expense. Some of them will do so through a direct attack, trying to imitate what you do with some differentiating attribute, such as lower prices, higher quality or better customer service. Others will try to change the game, playing a kind of guerrilla war around the edges of your business, looking for an opportunity or a misstep that lets them in. There is nothing soft or touchy-feely about defending your position of leadership.

As long as the market environment does not change much, it is relatively straightforward to defend your position of strength, since you have so much going for you, including a large customer base, positive brand recognition, strong financials and so on. But once the environment begins to change for any number of reasons - a new technology that lowers the barriers to entry, a new manufacturing process, alternative sales channels, a change in regulations - it opens the door for all those hungry competitors to start making progress, and, sometimes faster, sometimes slower, to grow at your expense.

Defending yourself against the inevitable attacks takes true innovation, perhaps the most important and most difficult kind. It is at these times that a company's management undergoes its toughest tests. This is when having an innovation culture is essential, one that is comfortable with tough competition, perhaps even welcomes it as a kind of "sport" that tests the company’s true mettle. Let me briefly touch on some key survival lessons I have picked up over the years, drawing heavily from my personal experiences at IBM.

Anticipating market changes and taking action. If the environment is going to change, you want to be the first to anticipate the changes and start preparing for them. Because so many of the changes taking place in business are linked to technology in one way or another, having a highly talented technical work force is more important than ever. But anticipating major changes, as well as adapting your products and services to the new market realities, while absolutely necessary, is not sufficient. Major technology transitions invariably require major and often painful business transformations as well. A company is truly tested when faced with how best to make such a business transition in as smooth and painless a way as possible.

At IBM, for example, our technical community had been anticipating the rapid advances of CMOS technologies in the late 1980s, which opened the door for new competitors to attack the mainframe with less expensive client-server UNIX and PC-based platforms. We knew what we had to do - transition the mainframes to exploit the new CMOS technologies and introduce IBM's own client-server platforms. However, these new CMOS-based platforms, along with the software and services around them, commanded significantly lower profit margins than we had been able to gain from our mainframe business over the previous twenty years. Consequently, we had to lower cost and expense significantly, close factories, lay off people and take a number of additional, very painful actions in order to adapt to the new environment.

Even though we had anticipated the technology changes, we were slow to react to them, and in the end only did so once we got into serious trouble, went through a "near-death" experience and a change of management at the top. What this means to me is that it is not enough to be innovative in formulating technical strategy and developing the appropriate new products, both of which we did. You need to then become even more innovative around the organizational, business and culture models needed to move the company to the new market realities. We delayed doing that, and it plunged us into a crisis that almost proved fatal to the company.

Bringing your customer base, legacy products and revenues into the future. While moving too slowly in response to changes can get you into serious trouble, moving too fast and risking leaving your customers, installed base and revenue sources behind can be equally deadly. In my opinion, the most critical innovation in the mainframe transition was the fact that we were able to reinvent the mainframe around the new CMOS technologies and parallel architectures, and thus bring our large and loyal base of mainframe customers with us into the future - along with the important revenue streams they represented for IBM.

Similarly, when we embraced the Internet and formulated our e-business strategy in the 1990s, our biggest challenge was both to invent the new Internet-based offerings like WebSphere and to make sure we Internet-enabled our existing offerings and installed base, so we could help all our customers become successful e-businesses.

Not straying too far from your capabilities and culture. Without a doubt, when technologies and markets change, a company has somehow to reinvent itself, to adapt to those changes. A common mistake companies often make is to try to model themselves too closely on the new companies that are growing up around them and successfully attracting their customers. While it is important to learn as much as possible from the success of others in adapting yourself to the new environment, the culture of a company can only stretch so far before it breaks, leaving employees, customers and everyone else confused as to what strategy the company is now following. It takes very innovative management to blend the new directions that markets and competitors are taking with your own strengths and culture to come up with a successful new direction for a company, one that fits both the marketplace and yourself.

In the last twenty years or so, many of the advances in IT have been coming from outside the "classic" IT and business markets. Parallel architectures, the Internet, Linux and open source, and more recently video and online games, are examples of technologies that first became successful in research and supercomputing markets, or in high-volume consumer markets. Since the majority of IBM customers are business enterprises, our key challenge over this period has been to bring these various technological advances to the world of business, something I think we have learned to do pretty well.

The facts show that the mortality rate for successful businesses is quite high. Most are no longer around after a few decades. There is no truer test of the ability of a business to innovate than to see it successfully reinvent itself and keep going year after year after year.

Comments

I would like to thank you for your wonderful blog. However, I would like to ask a serious question. A few years ago, senior level IBM executives visited with my employer, extolling the virtues of open source and Linux. As a longtime IBM customer, we enthusiastically embraced both, and now run most new applications on Red Hat Enterprise Linux - it has become our global standard.

This has meant a significant diminution in our interactions with IBM, as we now look to Red Hat for key technology direction. And they're obviously in conflict with IBM on most items, and have a considerable lock over software direction specifically.

How can you defend this transition as good for customers? Or good for IBM? I understand how it's benefited Red Hat - but I'm less clear on how it benefits us as a customer, or IBM as a supplier.

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